AT&T Inc. (T) Earnings Call Transcript & Summary

So yes, let me kind of do it in 2 pieces. We've had some events canceled like the NCAA tournament. When you have those canceled, you have an impact on your business, that is a loss of advertising revenues from those events not occurring and the ability to have to cancel the advertising and affecting advertising of those as well as you have an adjustment in sports costs and the fees that you pay and are responsible for on those events. That's one of it. That's when the event is canceled. And the second one is on the delay. Like the NBA, where we traditionally have had more expenses related to the first and second quarter with regard to the NBA seasons. That now normally wouldn't show up in these sports costs in the third quarter, but now many of the games have been played there, so we'll have higher sports cost. Likewise, in the first and second quarter, we would have had advertising revenues in prior years that we didn't have this year because we didn't have those sporting events. And now those advertising revenues will show up in -- and is released in part in the third quarter. I would suggest you -- that's how we run that. It will all depend on what viewership is. One thing I will point out is because of the concentration of games, we're seeing a lot more games played in odder times, earlier in the evening, during the day, later at night, some of those things across all sports in an effort to get them all in. And as such, that does have an impact on advertising revenues. So it does have an impact on viewership. It isn't as spread out and therefore is choosing the choice prime time viewing and prime time advertising times as we might otherwise have done. That's just something we're working through a little with the leagues on that. With regard to the rest of the Turner and the CNN, if you will, viewership has been pretty good. CNN, certainly news-based viewership is very good in an election cycle year and, quite frankly, in the year of the pandemic. So viewership is strong. We continue to see through the second quarter, good viewership in our main channels, our 4 big channels. And Turner quality channels continue to get in. And we have seen some challenges with just general advertising as airlines and hotels, restaurants may have pulled in their advertising [ dollars ].

And just to stop on kind of the Turner, but parlay it to DTV, the Entertainment Group. What's the trajectory of video subs look like these days? Are we at a stabilization to improving point? Are things worsening? Just a broad-brush update. And how do you stabilize EBITDA at the Entertainment Group with that kind of top line subscriber pressure if it persists?

Yes. So I think the first thing is on the EBITDA. I mean, I'd say we clearly have to take into account the COVID aspects. And if we pull out the COVID aspects, it may be much more -- we'll be much closer to stable. And quite frankly, if you take into account the COVID accounting aspects, we're actually growing EBITDA on an overall basis in EBITDA. But let me go this way with it. On the Entertainment Group and specifically on video subs, our focus is on entertainment, our quality subs that we have today on a value-creative basis and attracting additional ones on a value-creative basis. That's going to be adding subs on AT&T TV, which is a much lower cost customer acquisition model. That is we continue to provide good quality service to our customers but not chasing every customer. So rational marketing efforts, rational retention efforts. And that's going to be our focus. That will continue. And then bundling it with wireless, bundling it with broadband. The success we've seen with AT&T TV and bundling it with our fiber product inside our footprint's been encouraging. So we'll continue to focus on that. From an overall Entertainment Group perspective, continue to penetrate our fiber opportunity and continue to grow our broadband revenue base is going to be really important to that. As well as continuing to transform our cost structure, which we've continued to do throughout and saw that in our wireless margins. We certainly saw that in our business wireline margins and it's certainly helping in the Entertainment Group. So all of that is, if you will, in the plan to get us to continually improve and strive for better entertainment and overall business margins and cash flows.

And just to go to a topic that was somewhat of a coronavirus beneficiary, and that's Business Solutions. How much of the benefit from Q2 was from -- work-from-home was kind of onetime in nature, where businesses, individuals were upping their telecom needs during a time of crisis. And what are the growth opportunities and/or challenges in this Business Solutions business, which probably doesn't get enough attention?

Yes. And I agree it doesn't get enough attention when it generated what, $6 billion, of EBITDA for the quarter. That's a stacked number, a very healthy number. And the Business Solutions team is doing really great work in a business that often doesn't get the attention it deserves, certainly for the cash it generates. With regard to whether it will continue or not, Brian, I don't mean to be difficult, but I'd ask you, how long is the COVID impact is going to last? What are the extent work-from-home? How long do people want to be virtual or are people are going to be required to be virtual? And so some of those things are some judgment issues with regard to visibility and what you expect. Certainly, the services we provide have been, I think, accepted by our customers very positively, have a positive impact on us. We continue to make sure the quality there as you're doing today, that we're having conferences in this way. I would expect that -- will the business stay at some higher level on a going-forward basis? We certainly expect that. I think all of us are going to do more virtual call, less having a bigger impact of our business. I can't tell you, and I'm not going to predict and we're not giving guidance for third quarter on how much that will be retained or grown over the year. But I'm really pleased with the performance of the team and the performance of the network team that's providing that service.

Just kind of related to that, but just thinking out loud. But Zoom's obviously been popular. A lot of our clients focus on the software sector where RingCentral and their partnership with Avaya as well as AT&T, has been touted as a very smart, savvy move. Can you talk a little bit about AT&T's role in this video conferencing boom and this virtual conferencing boom? What's AT&T's role? And what are the ways in which you're participating in that boom?

Yes. I guess I'll give you a couple of different viewpoints from it. You may have seen pictures of cities across the United States and across the planet, but across the United States, on smog and congestion and so forth before COVID and then the clean air after 3 months of COVID. Well, I got to tell you, companies like ours and specifically ours played a role in that because of our broadband connections because of the fiber investments we made, because the connectivity we've provided, we may -- we enabled that. We allowed the business to continue to work. That's solely on our own, with -- in partnership with a lot of others in our industry. But quite frankly, it has made a huge difference. So with regard to that one, we're the enablers. We're the providers of connectivity. We're the ones who manage those networks and make sure that they work and carry those bits of bytes, whether they're video calls, whether they're voice calls, whether they're data bits and bytes. Whatever kind of connectivity, whether it's health records or whether it's manufacturing data inside a factory or the -- we provide that opportunity for secure, quality, high-speed connectivity anywhere people want it. We allow them to consume entertainment with it. That's our role. And whether it's HBO Max or whether it's a Zoom call, we're going to be involved in providing the delivery. That's our role, the quality networks we provide or what attracts our customers to using us. So I think we got a really long-term play in that, as we always have, and it will continue throughout. It's just a different piece of data, a different byte -- bits and bytes that we're carrying.

Absolutely. Understood. So can you offer any comments on the headlines around Xandr? Does Xandr operate more closely with WarnerMedia or DTV even though Xandr is now under WarnerMedia? And just any broad comments you want or don't want to make on Xandr.

Yes. So real quickly, advertising continues to be an important part of our business, as you know. And we've seen the results so far with regard to Turner and challenges that it faced with the loss of the NCAA tournament and the NBA and sports and the impact, and hopefully, we'll see some of that return the second half of the year. But advertising on -- whether it's on the Turner, the WarnerMedia side, whether it's on the Entertainment Group, but quite frankly, advertising for ourselves, specifically for our mobility business or our broadband business, advertising is going to be an important part of our business. So that's number one, and that's not going to change. Being able to provide quality advertising that is data-infused and data-empowered for the people that advertise on our networks, on our systems, whether it be DIRECTV or video or whether it be Turner, TNT and so forth, really important and we'll continue to work towards that. And that's going to be important, and using data to make our own advertising more efficient. So we've got a long-term commitment to it. We'll stay with it. We'll deal with it. Bringing Xandr and WarnerMedia or Turner's advertising unit just makes sense in this environment where you're focused on acting efficiently and acting as one. It's really important. That's what's critical about that. With regard to some of the other stories on -- that are speculative on transaction basis, I've got no comment, and we'll stick with that.

Okay. Great. And just on WarnerMedia, can you give us an update? There have been a number of management changes at different divisions of WarnerMedia. Do you feel like the setup is complete? Or what -- can you give us an update on just some of the management changes at Warner?

Yes, sure. We've had some -- we've got a lot of really great people and we've had a history of having a great people work for us and work with us and do great things. It was always about quality people. But what we've done is streamlining operations to be more focused on content development and the D2C process. That's what the goal was about. And so we've had to make changes. We -- they're tough to do, and we're doing it with great appreciation for all the people we've got. Secondly, we're going through a process where we're streamlining what I'll call the G&A support, whether that be in finance support, media support, the IT support, real estate support, whatever aspects of it, where we are going through a process to streamline those operations to make it more efficient to leverage our existing resources of the entire AT&T as well as within the -- all of WarnerMedia. This will allow us more flexibility. This will add better results for our shareholders in our business. And it's a normal part of the process as you lay out this plan to become a D2C provider, a storyteller or provider of entertainment wherever our customers want to consume or enjoy it. And that's where we're going. And so difficult, challenging because there's good people involved, but normal in this environment where you're trying to be efficient and effective and solely directed towards your goals.

Absolutely. Wanted to now cover an important topic with AT&T, as always, but it's really your capital structure and use of capital and free cash flow and deployment. So can you first probably talk about buybacks and how you strategically think about buybacks. And if you're rethinking, any thoughts around that? And then company's view on deleveraging, to what level you could ultimately get to or your goal? And what can you share about dividend policy, how you feel about it now and moving forward?

Yes. So let me take the easiest one first. From a -- just a factual perspective in the sense of over 2 years from June '18 to June '20, we paid off about $30 billion worth of debt or paid down $30 billion of debt. So we've been committed to managing our debt levels and bringing the quantum of debt down, and we've done that. The facts are the facts. We've done it through great cash flow generation as well as asset monetization. With regard to debt, I expect to continue to pay down debt. We will continue to generate strong free cash flows. I certainly expect that. As well as there are a number of asset monetization transactions in process, whether it be Puerto Rico, CME, some real estate, those kinds of transactions. But even with those transactions getting closed this year, we'll have a number of other efforts going on. We have a $500 billion-plus balance sheet of total assets. So think about the ability to harvest assets out of that is -- the opportunities are significant. And whether that shows up through free cash flow or whether it shows financing transactions and others, we'll continue to focus on streamlining the business, making sure we monetize noncore, nonstrategic assets and really operating on a cash-focused basis. That will allows us to continue to pay down debt. That will allow us to continue to stay committed to and pay a great dividend to our shareholders. I think we've given guidance in the past that we expect a dividend payout ratio of 60%, and our expectation is the low 60s. So we aren't changing that now. I feel very good about that. Second quarter certainly add to our optimism on that. But essentially, continue to be a very strong cash flow company that with asset monetization, some prudent management, allow you to pay down debt and allow you to continue to pay a solid dividend now and into the future. With regard to share buybacks, quite frankly, we continue to focus on it. We understand the cash cost of capital and evaluate things from a cash cost of capital and the differences between our borrowing costs and the dividend policy. But we're also taking, to an extent, the quantum of debt that we have and the ability to retain flexibility. We've shown that and we're going to continue to focus on that. So no announcements with regard to anything with regard to buybacks. But specifically, certainly, we understand the logic of the question. Lastly, I will tell you, continued flexibility kind of -- we've got a number of financing transactions this year that have spread our maturities out in the very manageable towers and taking advantage of historically low rates. But in the middle of all those right now, the bond exchange. So if a transaction's friendly to our bondholders and has respect for them, but gives the company significant flexibility going forward and allows us to lock in very good interest rates on a reasonable basis for our bondholders. So it's those kinds of things. The markets have been very friendly to us. We're borrowing money today in rates that are the lowest I've seen in my career, regardless of our debt rating agency scores. So it's an unusual time and we're taking advantage of it, strengthen the balance sheet for the long term.

All right, great. Well, John, with that, looks like we're bumping up against time here. So on behalf of Bank of America, I wanted to thank you for your time. I don't know if there's any closing words you wanted for the audience, but really appreciate your time.

Great chat, Brian. Thank you for hosting me today. Thanks, everybody, for listening. Two comments. One, please stay safe. It's difficult times, so please stay safe. And as always, folks, don't text and drive. The life you save could be a friend of mine or a relative of yours, let's just be really careful out there. Thank you all and take care.

Thank you.

Thanks, Brian.

Thank you, John. Appreciate it.